CONCEPT OF PERSONAL FINANCE
What Is Personal Finance?
Personal finance is the management of an individual’s financial resources and activities such as income, spending, saving, investing, and protection.
Why Is Personal Finance Important ?
Personal finance is important because it helps us reach our financial goals. A financial goal is a desire we want to achieve that requires money. An example of financial goals includes planning for a holiday trip, purchasing a new vehicle, moving into a new apartment, or wanting to make more money – anything that involves money is a financial goal.
What Elements are Involved in Personal Finance?
There are two elements involved in personal finance – the technical knowledge about personal finance and our behavior (human nature).
The technical knowledge of personal finance involved the understanding of income, spending, saving, investing, and protection.
Income - the inflow of cash received that will be allocated to expenses, savings, investment, or protection. The inflow of cash can be generated from performing work, interest payment, allowance, or other means that brings money into your pocket/bank account.
Spending - the outflow of cash to fulfill our wants and needs. This includes rent, mortgage, groceries, hobbies, travel, dining out, medical expenses, entertainment, or other purchases.
Investing - the act of purchasing an assets that comes with a risk to earn a return on the initial money invested/spend on the asset. For example, if you purchase a shoe for $100. Then the value of the shoe appreciated to $150 AND you sold the shoe. As the result, you received $50 profit in capital gain from the asset (shoe) that you purchase. However, if instead, the value depreciated to $50, then you incur a loss of $50 IF you sold the shoe.
Protection - Method of preserving yourself and wealth from unexpected events such as illnesses or accidents. This can be done through the purchase of life and health insurance and estate and retirement planning. Besides, if you are unhealthy/dead, how can you enjoy the money that you have accumulated right?
The next element in personal finance involves our human nature. One thing to remember here is that personal finance is not a one-time activity. It is a tedious, boring, exhausting journey that is beneficial for our future self. On the other hand, humans crave gratification – the sooner we receive it, the happier we become. As the result, plenty of people neglected their financial health in exchange for short-term pleasure. Therefore, developing traits such as discipline, a sense of timing, emotional detachment, and consistency is important to be successful in your personal finance journey.
Conclusion
Personal finance is the management of an individual’s financial resources. It is important because it helps us reach our financial goals. The two elements involved in personal finance are technical knowledge (the understanding of your own income, spending, investing, and protection) and your own behavior.